PSB Portfolio Update June 2009

June 16, 2009

Is It Time To Declare A New Bull Market?

No matter how bad the news, small company stocks keep marching higher and higher.

Unemployment at a 25 year high… no problem.  Consumer spending nonexistent… who cares?  Corporate earnings down 35% from last year… who needs earnings?

This seems to be the prevailing attitude amongst investors these days.

They’ve sent the Russell 2000 up 11% since our last update.  And, the index is up an amazing 53% since March.

Many doubted this rally was the beginning of a new bull market.  With the economy still in dire shape, it didn’t seem reasonable the market could make an extended run to the upside.  A retest of prior lows seemed inevitable.

But, that hasn’t happened… not yet anyway.

And, now there’s evidence the long-term trend has changed for the better.  An important technical indicator is signaling a new bull market has begun.  I’m talking about the Russell 2000 breaking through the all important 200-day moving average (“200 DMA”).

Let me explain.

Many investors see the 200 DMA as the dividing line between bull and bear markets.  When the index trades above the 200 DMA, we’re in a bull market.  When the index trades below it, we’re in bear territory.

Here’s the key.

When the index crosses the 200 DMA to the upside, it shows stocks are rising faster than the long-term trend.  Those who follow this indicator will often establish new long positions based on this signal.  And, like a self-fulfilling prophecy, this buying will often drive the index even higher.

Now, like any technical indicator, this signal is not always valid.

Sometimes the index crosses the average only to pull back below it.  Other times, the index criss-crosses along the average for a while until finally breaking up or down.

Only time will tell if this bullish signal holds true.  We’ll need to see the index test support at the 200 DMA.  If it holds, we can say with confidence a new bull market has indeed begun.

Now on to the updates…

Please Note:  We don’t necessarily update every open position each month.  We focus on the positions experiencing significant news, notable price movement, or a change in recommendation.  Please refer to the Performance page on our website for our current buy, sell, or hold recommendation for any positions not mentioned in the Update.

Position Updates

. . . . DRI, Corp. (TBUS) – Buy up to $2.00

We’re off to a great start with this June recommendation.  The stock hit a high of $1.87 for a gain of 57%.  And, it only took four days to do it.

What’s driving the stock?

Management re-affirmed strong guidance for the year.  They expect earnings to double on a 28% jump in revenue.  (And, the stock’s forward P/E is a low 6.3x.)

With TBUS trading below our buy up to price, you still have an opportunity to establish a position.  The stock is a “Buy” at $2.00 or less.

. . . . Great Lakes Dredge & Dock (GLDD) – Buy up to $6.50

GLDD is recommended in the June issue as well.  It’s trending higher with the 20-day moving average providing strong support.

We’re already showing a gain of more than 12%.

And, it has a lot further to run.

A reliable technical indicator is showing a bullish signal.  I’m talking about the 50-day moving average crossing the 200-day to the upside.  This usually means higher stock prices ahead.

Buy GLDD up to $6.50.

. . . . ChinaCast Education (CAST) – Hold

CAST is powering higher with absolutely no regard for the laws of gravity.  The stock is up 24% since our last update.  (Nothing better than monster earnings to drive a stock higher!)

And, that’s not all.

The for-profit education juggernaut hit another new high giving us an amazing 132% gain.  Congratulations on doubling your money in just three month’s time!

But make no mistake about it, the ride’s not over.

With a PEG ratio of just 0.53, CAST is substantially undervalued relative to its growth rate.  And, our technical analysis shows the current uptrend is firmly intact.

Continue holding these shares for bigger gains to come.

. . . . Hi Tech Pharmacal (HITK) – Hold

To say HITK’s a terrific winner for us is a gross understatement.  The stock’s up a staggering 73% since March.

The shares are now consolidating this big gain in a tight horizontal trend.  After a strong upward move, a stock will often trend sideways before moving higher.  (Think of it as the calm before the storm as new buying begins.)

I think we’ll see HITK break out into a new uptrend very soon.

Here’s why.  The company’s set to report fourth quarter and full year 2009 earnings in mid-July.  And, I believe they’re both going to be huge.

For the quarter, I’m looking for a 39% jump in revenue and a nearly ten-fold increase in earnings.  For the year, I’m expecting revenue to soar 60% and earnings to rocket 182% higher.

Hang on to this stock with both hands.

. . . . China Security & Surveillance Technology (CSR) – Hold

CSR is moving higher by leaps and bounds.  It’s up an impressive 29% since our last update.

The stock’s heading for a retest of resistance around $9 a share.  If it breaks through to the upside, we’re off to the races.

Now that CSR’s trading substantially above our buy up to price, I’m moving it from a “Buy” to a “Hold”.

. . . . GigaMedia (GIGM) – Hold

GIGM finally reported first quarter results.  Revenue came in slightly higher than expected. But, earnings missed by a penny.  Both are down significantly from last year’s quarter.

As you can imagine, the Street’s not impressed.  The shares are falling steadily as many investors head for the exits.

But, we’re not ready to throw in the towel just yet.

Management believes the company’s hit bottom in this cyclical downturn.  What’s more, they expect to see improved results in the second half of the year.

There’s also another interesting twist to the GIGM story.

Management announced it’s close to selling the online poker and casino gaming software business.  A sale might be good for the company, as this segment’s dragging down overall results.

GIGM would then be a pure play on the extremely fast growing Asian online games market. The company’s Asian Online Games segment is showing record top and bottom line growth this year.

Given all the uncertainty, we’re keeping GIGM at a “Hold” for now.

. . . . MFA Financial (MFA) – Buy up to $6.75

MFA began a new uptrend in late April.  The stock hasn’t looked back since the 5-day moving average crossed the 20-day to the upside.  Now, the 20-day is providing solid support for the uptrend.

And, that’s not all.

The stock recently hit a new high of $6.91, giving us a gain of 27%.  No doubt the company’s strong first quarter earnings and juicy dividend are driving the stock higher.

But, that’s just part of the story…

Strong buying by company insiders is also attracting investors.  Since February, five officers have purchased more than 50,000 shares between $5.50 and $6.00 per share. And, the company’s CEO purchased 7,000 shares in May for about $6.10 per share.

These insider purchases show MFA’s top executives are confident the stock is going to move higher from here.  And, we couldn’t agree more.  MFA is a “Buy” at $6.75 or less.

. . . . Alliance One International (AOI) – Buy up to $5.50

Benjamin Franklin once said, “He that can have patience, can have what he will.”  Nothing proves this better than AOI’s stock performance.

For eight months, the stock languished in negative territory.  While our mettle was tested, we stuck to our guns.  Now, we’re finally being rewarded for our patience.

Last week, the company reported amazing results for fiscal year 2009.  Net income soared 725% to $132 million.  And, earnings per share rocketed 689% higher to $1.50.

As you can imagine, the stock is surging higher.  The shares hit a new high of $5.71, giving us a gain of 42%.

AOI remains a “Buy” up to $5.50.

Action To Take

• Move China Security & Surveillance Technology (CSR) from “Buy” to “Hold”.  The stock is trading above the buy up to price.

 

Category: PSB Portfolio Updates